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High risks, low prices: Geopolitics and the energy market

The energy sector has always been highly sensitive to geopolitics, with breaking news pored over by analysts who calculate its impact on prices. But as the pace, frequency and unpredictability of geopolitical events and risks accelerates, are organizations doing enough to keep up?

In a recent live broadcast hosted by Thomson Reuters, Chris Parry — a former Rear Admiral in the Royal Navy and now geopolitical strategic forecaster — had a stark warning that companies which fail to properly assess geopolitical risks will suffer as risks become more complex and volatile.

Oil prices to stay low

Despite multi-tiered and ever shifting events and alliances in the Middle East, Chris expects the downward pressure on oil prices to be a constant feature for the foreseeable future. Although it is not yet clear what impact the initial public offering by Saudi Aramco will have on oil prices, companies should prepare for all possibilities.

Chris Parry: One thing we have to bear in mind is that there’s always going to be pressure down on oil in terms of price, and that is because… There are two reasons. One is what I call the democratization of energy now. Both oil and gas now, everybody’s got it. If you scratch the surface of most countries and most offshore zones, there’s oil and gas there now, and it’s a question of the cost it takes to get it out. So there’s always going to be a downward pressure on oil, and that is the price at which you get it either out of the ocean or you frack it.

While accepting that any major destabilization in a key oil producing region could create a spur in prices, he believes that the inexorable logic of demand and supply will see prices revert over the longer term.

Quote from Chris Parry, strategic forecaster.

It means oil producing countries may be less focused on finding new sources of energy and more interested in maintaining their current trading relationships. Chris cites Russia as a prime example of this and believes much of its foreign policy will continue to be driven by such imperatives.

Chris Parry: And I think in future those companies that fail to actually invest properly in geopolitical risk and tools to assess that risk are going to suffer because the world’s getting more volatile, it’s getting more complex, more ambiguous, and I think unless that investment is made people are going to find that they’re very, very surprised by very many things.    

Quote from Chris Parry, strategic forecaster.

Changing risks, constant vigilance

Of course, Russia is not alone in this as every major player looks to protect their interests in an increasingly complex world: “If you’re not at the table, you’re on the menu,” as the proverb goes.

Chris feels that there has been a key change in US foreign policy, with it no longer acting as ‘sheriff’ but more as the ‘cavalry’, actively encouraging its allies to take the initiative but standing back from getting directly involved except in an emergency. He also argues that traditional, fixed alliances are being in part replaced by one-off arrangements based on specific interests. So, for example, America needs China to try and put pressure on North Korea and Russia to try and find a solution in Syria and fight Islamic State.

Managing your supply chain

Geopolitical risk in the energy sector also filters into supply chain management especially in light of the growing political instability and outbreaks of civil wars in key oil-rich regions. As a result of these events, companies face a heightened risk of being associated with ‘politically exposed’ individuals due to lack of transparency around tier one and beyond suppliers  as 35% of the energy sector characterise their organization’s supply chain as ‘very complex’.

The risk has increased even more in the wake of the passage of the Countering America’s Adversaries Through Sanctions Act (CAATSA) signed by President Trump. Among other things, the law expands the prohibitions on supplying Russian oil projects that could affect both US and non-US based parties (so called “secondary sanctions”).

Geopolitical Insights: Actionable insights for more effective short and long term strategies. Watch the broadcast now.Watch the full broadcast for more insights.

Learn more: Winning the information game

As the largest provider of news, referential data and analytics to the world’s business community, Thomson Reuters is strongly positioned to help the energy sector mitigate geopolitical risks.

Our trusted Reuters news, with 200 specialist commodities reporters, provides exclusive and timely news on political and macroeconomic changes that affect the commodities market. In addition, our Eikon platform provides an in-depth, independent analysis and forecasts on the energy market in order to ensure that you can act with confidence. Our extensive risk management solutions can also help militate against supply chain risk. This includes our ONESOURCE Global Trade Restricted Party Screening (RPS) module, which provides for the automatic screening of supply chain partners through ERP integration using Thomson Reuters World Check risk intelligence.

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